CarCity is a big retailer for car parts and accessories. The store stocks different types and sizes of car tire. One of the best selling tires is the Tiger Model R125, which is currently purchased from a factory in Indonesia. An analysis of the purchasing operation shows that approximately 2 labor hours are required to process a purchase order, regardless of the quantity purchased. Salaries in the purchasing Department average OMR 15 per hour, including employee benefits. In addition, a detailed analysis of 20 previous purchase orders showed that OMR 123 was spent on telephone, paper, and other consumables directly related to the ordering process Shipping cost from Indonesia is OMR 250 for a container. A container has a capacity of 800 tires. The lead time for shipments from Indonesia is 15 days. Finally, CarCitys financial analysts established a holding cost of 30% for this type of tire. The annual demand for the R125 tire is constant at a rate of 8400 units. The store purchases the tires from the Indonesian factory at a cost of 12 OMR per unit. The current practice at CarCity is to place one re-stock order each month. The store operates 350 days per year.

1. State the optimal inventory policy.

2. What is the total annual inventory cost under the optimal inventory policy, and how much savings does the Company achieve by implementing the optimal policy?

3. The store management has decided to allow back orders. What would be the optimal inventory policy if back ordering is acceptable, and how much would CarCity save in total cost? Backordering costs are 45%.